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The border adjustment tax is just another faux silver bullet

Hanging around Washington can be like watching too much late-night TV. Every six minutes, you’ll hear someone try to sell you a product that will solve all your problems. You can float in your boat that has a screen door for a bottom, effortlessly remove acres of weeds from behind your house, or end your aches and pains. Just call an 800 number (and have your credit card handy). And if you hurry, you’ll get free shipping!

If you change channels to the news, you’ll find that what “Stops Leaks Fast!” in Washington these days is the “border adjustment tax.” In short, you are told, the border adjustment tax rebates corporate taxes on exports at the border, but imposes taxes on imports when they cross the border. No taxes on our exports, taxes on our imports. Boom: more exports, more U.S. production, more jobs, higher wages. A (domestically grown) chicken in every pot.

You’ll be told that the Unites States has been so dumb that we are the only country in the world not to have a border adjustment tax.

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Not true. The United States is the only developed country that doesn’t impose a “value-added tax,” or “VAT,” which is a national sales tax, which in turn is the only kind of tax allowed by international trade agreements to be rebated at the border. The folks trying to get your credit-card information to sell you a “border adjustment tax” would not dare to market a national sales tax. So their border adjustment tax is a little different (more on that in a moment, when we return to our regularly scheduled program).

But regardless of what other countries do, would the border adjustment tax float our boat? Would it increase exports and reduce imports? Well, to reduce imports it would have to increase their prices, which is why the prospect of such a tax has retailers worried. Retail stores sell (which means that U.S. consumers buy) a lot of imported goods. Many low-value goods are made overseas, as higher-skilled U.S. labor is occupied with more-complex, higher-value goods. Even those high-value products include relatively simple lower-value imported components, which would suffer from the border adjustment.

Advocates of the border adjustment tax think that they have the answer. They are telling retailers that if we enact the border adjustment tax, the value of the dollar will rise, allowing the retailers and their customers to buy just as many imports for the same number of dollars. There’s just one problem with that “solution” — if the dollar does appreciate and reduce the prices of our imports, it will also raise the prices of our exports, precisely undoing the supposed beneficial effects on trade. So seekers of exports and jobs are getting an opposite and contradictory sales pitch from that to retailers and consumers. These contradictory stories can’t both be true.

And then there is the viability of the border adjustment in the first place. International trade agreements do restrict border adjustments to consumption taxes, like a sales tax or a VAT. But border adjustment tax advocates would not dare to advocate a new national sales tax. So they have concocted a modified VAT — with a deduction for wages paid — and told American voters that this “border adjustment tax” is a corporate income tax. They then plan to tell the international trade authorities like the World Trade Organization (WTO) that their concoction is not a corporate income tax, but rather a VAT. Again, these are two opposite and contradictory sales pitches. Both can’t be true.

The WTO would have the last laugh, whichever way they rule. If they disagree that the border adjustment tax is a VAT, they can allow other nations to impose compensating duties on U.S. exports. So any possible U.S. trade advantage would be lost.

But suppose that the WTO decides to cave to the United States, rule that the border adjustment tax is a VAT, and allow it to be border adjusted. Then all other nations can border-adjust their corporate income taxes, which are every bit as much VATs as is our proposed border adjustment tax. So once again, the trade advantage of the border adjustment tax is gone. The lesson is that you can’t win a game in which the other side can always simply match your last move.

So what should we do about our corporate income tax (and our individual income tax too)? Well, we did it before, and we can do it again by closing the loopholes and lowering the rates. As in the 1986 tax reform, make taxation more uniform and fair across different lines of business, and benefit everyone by allowing people and firms to keep more of what they earn from extra work effort, saving, and investment.

We can move the U.S. corporate tax rate from the highest in the world to the middle of the pack and still pay for national security, food safety inspections, and more. No, we won’t undercut the Cayman Islands’ tax rate, but global businesses will want to be in the United States even more than they do today. Not only will our tax rate be lower than it is now, but also we will remain the world’s biggest market, with the best trained, most highly skilled workforce.

We should play to our strengths, which do not include concocting clever tax deals fit for a light-night cable TV infomercial. Americans compete and win in the marketplace. Let’s reform the tax code to do that.